http://www.NewsAndOpinion.com --
WIDESPREAD talk of an imminent and robust economic recovery is now being
tempered by the sobering reality that the economy is far from out of the
woods, and the recovery, when it finally does arrive, may well be rather
lackluster. On Jan. 11, Fed Chairman Alan Greenspan announced, "It is still
premature to conclude that the forces restraining economic activity here and
abroad have abated enough to allow a steady recovery to take hold," which is
Greenspanese for, "Whoa, hold your horses." Economic statistics suggest
that the economy remains in a deflationary contraction. Despite the hype
about a so-called "V-shaped" recovery, the only "V" in sight is the rebound
from 9-11 to the depressed level we were at the day before.

Now comes Sen. Ted Kennedy with the strangest idea I've heard since
Senate Democratic Leader Tom Daschle said two weeks ago that President
George W. Bush's tax cut caused the recession and is making it worse by
creating a deficit. But give Kennedy credit for honesty; he says
forthrightly what Daschle won't say, namely that we should increase taxes.

If Kennedy wants to repudiate his brother President John F. Kennedy's
legacy of cutting tax rates across the board to get America moving again, I
think someone should defend that heritage. Maybe Bush should challenge
Kennedy to a debate: Kennedy can defend his thesis that tax cuts created the
recession, are making it worse by creating a deficit and that a tax increase
is the solution to reviving the economy. Bush could defend the thesis of
Presidents Kennedy and Ronald Reagan that recessions create deficits, that
across-the-board tax rate reductions get the economy growing again and turn
deficits into surpluses.

The problem with Kennedy's argument is that it confuses tax rates with
tax revenues. He makes a fundamental error that his brother John did not
make in 1960-61 when he urged the Congress to cut tax rates across the board
by 30 percent. Congress did finally cut tax rates, and revenues increased,
which proved President Kennedy right when he said:"It is a paradoxical truth
that tax rates are too high today and tax revenues are too low, and the
soundest way to raise the revenues in the long run is to cut the rates now.
The purpose of cutting taxes now is not to incur a budget deficit, but to
achieve the more prosperous, expanding economy which can bring a budget
surplus."

Ted Kennedy and Tom Daschle are not alone in their confusion; most
analysts remain perplexed about the economy. Washington Post columnist
Michael Kelly wrote recently that "Most economists don't understand this
peculiar recession especially well. We know this because most of them didn't
predict it, which wasn't surprising because most didn't understand the
preceding boom, either."

Amidst the confusion, however, a small group -- Brian Wesbury, Larry
Kudlow, David Malpass, Alan Reynolds, David Gitlitz, George Gilder, Richard
Rahn, Lawrence Hunter, Jude Wanniski and I -- got it right, both on the boom
and on the recession. In retrospect, this group had a pretty good
understanding that the economic boom sprang from an unleashing of
investment, risk-taking and productivity growth made possible by tax rate
reductions, tariff reductions, deregulation, government spending restraint
and the blossoming of the Internet and other advances in high tech.

We also debunked the prevailing myth of the era that the boom was a
mixture of "fiscal discipline" and "irrational exuberance." We never bought
the nonsense that "fiscal discipline," aka tax increases and debt reduction,
lowered interest rates and produced the only "legitimate" increases in
investment.

Nor did we believe that irrational euphoria and blind greed misdirected
markets and inflated the economy into a speculative bubble of "extravagant"
investment, causing the economy to grow "too fast" and the stock market to
fly "too high." And we repeatedly warned, to the point of making pests of
ourselves, that Greenspan would bring the new economy crashing down if he
persisted in a deflationary monetary policy grounded in these myths.

In retrospect, this cadre of folks can claim some measure of credit for
having demonstrated insight and foresight on the economy that most analysts
lacked. That surely doesn't entitle them to have their opinions accepted
without question in the future, but it should earn for them a special
hearing today as they offer opinions on what it will take to restore growth
and prosperity, not only to this country but also to the entire world. The
recession is a global recession, and it was created by deflationary monetary
policy here in the United States.

To ensure a robust economic recovery, the Fed must change its operating
procedure and stop targeting interest rates -- before it gets them all the
way to zero without solving the problem as happened in Japan - and begin
using a commodity price rule to reverse the deflation. Congress and the
administration must cut tax rates across the board even more than they did
last year, cut the capital gains tax rate and reform the tax code to remove
the tax penalties on work, saving, investing and risk-taking to get the
economy moving and restore surpluses.

As for the Kennedy brothers, history demonstrates that John was right and
Ted is
wrong.

Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive
Enterprise Institute. Comment by clicking here.

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